Iran's Grand Bazaar on strike in tax showdown

* Strike at Grand Bazaar enters second week

* Merchants historically influential in Iran

* Vendors want value added tax scrapped

TEHRAN, July 12 (Reuters) – With shops that sell everything from herbs and spices to carpets and gems now firmly closed, Tehran’s Grand Bazaar is on strike with merchants warning that higher taxes could force them to shut down for good.

The usually bustling corridors of the centuries old market, known as “Iran’s economic pulse”, have been deserted for the past week in a standoff between the hard-line government and merchants. Some shops were draped with black banners in protest.

Work stoppages are rare in Iran but President Mahmoud Ahmadinejad’s decision to raise the rate of Value Added Tax (VAT) on goods set off a strike that merchants have threatened to extend despite a government offer to suspend the increase.

“We cannot even pay salaries to our employees. How can we pay higher taxes?” said Ali Akbarzadeh, a bazaar jeweller.

“For sure closing shops damages us financially. What else can we do? Higher taxes will paralyse the bazaar,” said one vendor, declining to be named, adding: “We have families to take care of.”

The strike poses a political and economic challenge to Ahmadinejad, after last year’s election which the opposition says was rigged and the leadership said was fair. The vote triggered bloodshed and authorities are anxious to avoid unrest.

“I heard some angry merchants chanting slogans against Ahmadinejad,” said a shopkeeper, who gave his name as Ali, adding: “I also saw security forces clashing with some vendors … Police were forcing some merchants to open their shops.”

Opposition websites, including Norooznews, said: “Some people with sticks and stones shattered the windows of some shops that were closed in the bazaar.”

Reports of clashes could not be confirmed independently.

Iran’s economy is over 60 percent dependent on oil income and the sharp fall in oil prices threatens its finances. The government had hoped to fill the shortfall by increasing tax.

The tax forms part of wider economic reforms planned by the government, including a bill that will end subsidies on energy and food.

Iran’s government is locked in a row with the West over its nuclear programme which the West suspects aims to produce a nuclear bomb and which Tehran says is intended to generate power. Tightening sanctions also hurt Iran’s economy, analysts say, but the authorities deny this.

POWER OF THE BAZAAR

It was the second time traders had closed their shops on such a scale since the 1979 revolution, when the bazaar and its merchants played a key role in ousting the U.S.-backed shah.

In 2008, Ahmadinejad was forced to suspend implementing the plan to introduce a three percent VAT for two months after merchants in Tehran and other cities went on strike for a week.

Located in southern Tehran, the centuries-old bazaar sells anything from paper and copper to confectionary and watches. Conservative politicians traditionally adopt a low-tax, free-market approach to the bazaar.

Since its implementation, the VAT rate has been raised annually by between six and 15 percent, depending on the goods. But the government recently proposed increasing the top rate of VAT to 70 percent. This was so unpopular the plan was suspended.

“The government reached an agreement with merchants not to increase the tax more than its annual 15 percent,” said state media. But merchants want the plan to be scrapped altogether.

The government, however, has made it clear it has no intention of completely abandoning the tax.

Shopkeepers say the imposition of higher VAT will only push up further already high prices and hurt business.

Some shop-owners closed their businesses, fearing violence and only a few stalls were open. Police patrolled the bazaar’s empty winding streets and alleys.

One merchant in the steel section of the bazaar said the strike would continue on Tuesday.

“Today we came to our offices to sort out our financing issues but there are plans to carry on the strike on Tuesday,” the steel merchant, who asked not to be named, told Reuters by telephone.

Ahmadinejad came to power in 2005 on a pledge to share out Iran’s oil wealth fairly. But critics say his spending of petrodollars fuelled inflation, said to be running at an annual 10 percent. Some critics say inflation is more than 30 percent.

The opposition Jaras website said strikes were held in other cities like the northeastern holy Shi’ite city of Mashhad.